Not an Awe-inspiring Result but Telstra meets Telco Guidance Range

Summary

• Australian telecommunication giant, Telstra has been sweeping the market with robust customer growth, strong future outlook, continuous drive towards its strategic initiatives, albeit with a couple of hiccups.
• On 13 August 2020, Telstra unveiled its FY20 results ended 30 June, with AU$26.2 billion of total income, AU$1.8 billion noted as NPAT and AU$8.9 billion as EBITDA meeting market expectations and was in line with FY20 guidance.
• Owing to COVID-19 pandemic, TLS witnessed an impact on its business performance in FY20. However, the Company expects FY21 underlying EBITDA to be in the range of AU$6.5 - AU$7.0 billion; Capital expenditure in the range of AU$2.8 - AU$3.2 billion; Total income in the range of AU$23.2 - AU$25.1 billion.

Telecom Companies have been dealing robustly with COVID-19 pandemic by ensuring service continuity via enlarged traffic growth without much disruption.

Notably, telecom firms had adopted numerous innovative measures such as waiver of late payment fees and disconnections, providing unlimited data to retain their existing customer base and strengthen their loyalty.

During this journey of digital transformation coming out of the pandemic, Telstra Corporation Limited (ASX:TLS), the flag bearer of telecommunications in Australia has felt the turbulence with a couple of hiccups.

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On 13 August 2020, the telecom giant witnessed a drop of 8.26% in its share price to settle at AU$3.11. The same day the Company released its financial results for full year ended 30 June 2020, as discussed in the article.

Let us now deep dive and acquaint ourselves with the latest announcement of the Company.

It is worth noting that Telstra reported its total Income, NPAT and EBITDA in accordance with market expectations and guidance along with robust growth in the number of mobile services.

Operational performance

Telstra demonstrated the strength of its leading market position in the competitive and challenging Australian telecom sector by unveiling bolstered customer base growth. During FY20, TLS was noted to have added 347,000 wholesale services; 171,000 retail prepaid handheld users; 240,000 retail postpaid handheld services; and 652,000 IoT services.

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Financial performance

The Company noted a y-o-y decline of 5.9 per cent in the total income to AU$26.2 billion, demonstrating the fact that the Company achieved its FY20 guidance, which was in the range of AU$25.3 billion to AU$27.3 billion.

Additionally, TLS’ net profit after tax (NPAT) witnessed a decrease of 14.4 per cent to AU$1.8 billion and earnings per share (EPS) noted a fall of 15.5 per cent to 15.3 cents.

Moreover, for FY20, a decline of 6.7 per cent to AU$13,326 billion was observed in revenues of Telstra’s largest segment, Consumer and Small Business providing telecom services such as mobiles, fixed, internet, telephony and Pay TV/IPTV and digital content to consumer and small business customers.

This decline was echoed by a y-o-y decline of 8.4 per cent in the fixed products and 5.2 per cent in mobile services revenue.

Furthermore, total mobile revenue witnessed a fall of 4.4% y-o-y to AU$10,084 million, primarily due to a reduction in its postpaid and prepaid average revenue per user (ARPU) and lower hardware volumes.

Notably, revenue from Telstra’s enterprise segment decreased by 3.3% y-o-y to AU$7.97 billion due to fall in the Data & IP legacy calling and legacy fixed products.

These plunges were offset by a substantial reduction in operating expenses during FY20. TLS’ operating expenses (on a reported basis) declined by 14.5 per cent (y-o-y) to AU$16,951 billion in FY20 thanks to strong progress made on its T22 strategy front.

Telstra’s reported earnings before interest, tax, depreciation, and amortisation (EBITDA) was AU$8.9 billion, and underlying EBITDA (on a guidance basis) was AU$7.4 billion.

At a granular level, underlying EBITDA was within its guidance range, while representing a decline of 9.7% on the previous year. Moreover, if in-year nbn headwind were excluded, TLS’ underlying EBITDA would have swelled by ~ AU$40 million in FY20.

Notably, the underlying result included an estimated net negative impact from COVID-19 of ~AU$200 million, relating to lower international roaming, delays in NAS professional services contracts, financial support for customers, and additional bad debt provisions.

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Dividend

Telco fulfilled its guidance of AU$3.3 billion to AU$3.8 billion for free cash flow in FY20 and stood at AU$3.4 billion.

In light with the striking FY20 guidance, the Company unveiled an 8 cents fully franked final dividend and would further be able to maintain its full-year dividend of 16 cents per share (cps). This would see AU$1.9 billion returned to TLS’ shareholders for the year.

Notably, the final dividend of 8 cents per share would be paid on 24 September 2020.

Telecom giant, TLS’ FY21 outlook

Despite the fact that no business remained immune to any disruptions and difficulties during the pandemic, Telstra provided strengthened guidance for FY21.

Going forth, for FY21, TLS projects the following-

• Total income in the range of AU$23.2 - AU$25.1 billion;
• Underlying EBITDA, between AU$6.5 - AU$7.0 billion;
• Capital expenditure in the range of AU$2.8 - AU$3.2 billion; and
• Free cashflow after operating lease payments to be in the range of AU$2.8 to AU$3.3 billion.

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Although TLS did not report awe-inspiring financial performance, it managed to be within the previously provided guidance range. Also, its robust operational performance with a strong future outlook, continuous drive towards its strategic initiatives makes it an attractive stock.